Post-Mortem on the Commission on the Reform of Ontario’s Public Services: Discipline in Health Spending the Anchor to Returning to Budget Balance

 

The Ontario Government struck the Commission on the Reform of Ontario’s Public Services (the Commission) in 2011 with the singular mandate of advising on how to balance Ontario’s budget by 2017-18. The Commission reported in early 2012 with a plan to balance the budget in 2017-18 on the basis of restraint in spending and almost no policy enhancement to revenues. The Commission used what it felt was modest, but realistic economic assumptions.

The Commission was created in the context of an Ontario deficit of $19.3 billion in 2009-10 and $14.0 billion in 2010-11. There was little confidence from analysts, the media and likely the public at the time that the deficit would be reined in and considerable skepticism that the Government would limit spending as severely as the Commission recommended. Yet on April 27, 2017 the Ontario Government released a budget showing a balanced budget for 2017-18. Given an estimated deficit of only $1.5 billion for 2016-17, the projection of balance does not seem nearly as far-fetched as once perceived. Not only does the Budget project a balance for this year, but the projected net debt-to-GDP ratio for 2017-18 of 37.5 per cent is close to the Commission’s “preferred scenario” of 37.0 per cent indicating that the province’s fiscal track over the past 7 years has not substantially deviated from the Commission’s recommendations.

This note explains how Ontario’s large deficits have been eliminated and compares the actual path to balance with the prescription of the Commission. The table below shows the components of a balanced budget from the Commission’s “preferred scenario” relative to the projection in the 2017 Budget.

 

2017-18                       compound growth rate 2010-11 to 2017-18

(billions of dollars)

Commission       2017 Budget                   Commission     2017 Budget

Revenues                         134.7                             141.7                               3.4                     4.1

Program Spending         117.5                             129.5                              0.8                     2.1

Interest on Public Debt   15.3                               11.6

Reserve                                 1.9                                 0.6

BALANCE                               0.0                                 0.0

 

Commentary on the 2017 Ontario Budget has focused on revenues coming in stronger than anticipated. Indeed, revenues for 2017-18 are now projected to be $7.0 billion higher than the Commission foresaw. As noted by both the Commission and the Ontario Government, revenues tend to grow in line with nominal GDP. The Commission’s projection of nominal GDP growth was uncannily accurate in calling for 4.1 per cent average annual growth compared to the Budget figure of 4.0 per cent. So stronger performance of the economy does not explain the additional revenues. Both revenues and program spending are now $0.5 billion higher than the actual figure the Commission worked with for the base year 2010-11. This mostly reflects accounting changes that shifted some tax credits from being represented as negative revenue to positive program spending. Assuming this effect is fairly flat over the years, this accounting change explains $0.5 billion of the higher revenues in the budget but this has no effect on the budget balance. The Commission did not rely in its projections on any significant policy-induced revenue enhancement. But some steps have been taken by the Government. The largest is the $1.8 billion projected to be realized by the sale of carbon emission permits in 2017-18. This raises revenues but as the Government intends to recycle the money through environment-related spending, it also raises spending by the same amount and does not affect the deficit. Revenues are embedded in the Budget for the broadening of ownership of Hydro One and the sale of the headquarters of the LCBO and Ontario Power Generation. The Budget does not specify an amount for these sales so for our purposes here we will use the figure of $1 billion that has been speculated in the media. We note, however, that this may not be accurate. The Ontario Government introduced a surtax on higher income earners and estimated at the time of introduction that it would raise revenues $635 million per year. Although some analysts have argued less money will be raised, we will use this figure here.

With the proceeds of the carbon permits, asset sales and the high income surtax, revenues in 2017-18 might have been boosted a total of $3.4 billion through policy actions not anticipated by the Commission. Adding back the $0.5 billion of revenue boost through accounting changes suggests that $3.9 billion of $7 billion higher revenues in the Budget can be explained by identifiable factors. This leaves $3.1 billion that might be attributable to differences in economic performance or forecast error on the part of the Commission. One perspective on this is to compare the Commission’s revenue projection of a 3.4 per cent growth rate to the Budget projection of 3.7 per cent per cent after subtracting out the $3.4 billion of identifiable policy revenue-boosters.

The two conclusions from this analysis of revenues are that first, the Commission’s forecast of the revenue take without policy changes was reasonably accurate, but with a projected growth rate of 3.4 per cent compared to the Budget figure of 3.7 per cent, the Commission did understate 2017-18 revenues on this basis by $3.1 billion. Second, the Government took policy steps that might have boosted 2017-18 by $3.4 billion. In combination, the Budget had an additional $6.5 billion of revenues that it could use to finance higher program spending without impacting the bottom line budget balance. In the case of the revenue from carbon trading the proceeds are to go to environment-related initiatives and the proceeds from better asset management are to eventually go to infrastructure.

Commentators have put less emphasis on public debt charges remaining quite subdued. The Commission thought debt charges would rise $5.8 billion from 2010-11 to 2017-18 as interest rates returned to more “normal levels”. Instead interest rates have remained very low and debt charge are on track to rise only $2.1 billion, giving a $3.7 billion break to the fiscal balance in 2017-18 relative to the Commission’s projection. The 2017-18 Budget features a contingency reserve $1.3 billion lower than recommended by the Commission.

With revenues $6.5 billion higher (excluding the accounting changes that raised revenues and program spending), public debt charges $3.7 billion lower and the reserve $1.3 billion lower, the Ontario Government was able to show a balance for 2017-18 with program spending $11.5 billion, or almost 10 per cent, higher than projected by the Commission. The Commission did not believe the budget could be balanced if program spending rose faster than an annual pace of 0.8 per cent. Instead, a program spending growth rate of 2.1 per cent has been possible while still returning to budget balance.

Keeping overall program spending to 2.1 per cent per year growth on average is still a fairly tight degree of restraint. Such a pace has just barely kept program spending on pace with inflation. The combination of inflation and population growth will be around 2.8 per cent per annum from 2010-11 to 2017-18, so the 2.1 per cent growth in program spending is a 0.7 per cent per annum reduction in real per capita terms. The restrained pace of spending growth especially marks a sharp break from the rate of growth of program spending prior to 2010-11. From 2000-01 to 2010-11, Ontario’s program spending had grown at an annual average pace of 6.5 per cent.

The Commission made recommendations for program spending growth in each major component of spending and below we compare those recommendations with the projections in the 2017 Budget.

 

Compound Annual Growth Rates in Program Spending

Commission                            2017 Budget

Health                                               2.5                                           2.6

Education                                         1.0                                           2.5

Post-Secondary Education           1.5                                           2.0

Social Services                                 0.5                                           3.8

Other                                               -2.4                                            0.1

 

The Ontario Government allowed program spending to increase faster in all major components than recommended by the Commission with the notable exception of health where spending has been almost identical to the recommended pace of 2 ½ per cent per annum. At least from a fiscal perspective this is quite an achievement because the Commission felt restraining health care spending to this pace would be quite difficult given pressures from sources such as demographics and the much faster rate of expansion in the previous decade. Ontario’s health spending had increased at an average annual pace of 6.9 per cent from 2000-01 to 2010-11. The growth pace had been moderating, however, with growth of 5.5 per cent 2007-08 to 2010-11 and 3.7 per cent in 2010-11. The Commission acknowledged studies that projected health spending under “status quo” policy settings to rise around 6 ½ per cent per annum in future due to a combination of demographic, inflation and intensity-of-use pressures. However, for its own “status quo” fiscal projection the Commission assumed 4.9 per cent annual average growth in health spending, extrapolating the recent efforts at efficiency increases to lead to lower future spending growth. The Commission also worried that restraining health spending to a growth rate as low as 2.5 per cent for 7 years might lead to pressures that would see spending surge in the aftermath, as it had done after the period of spending restraint in the 1990s. To avoid this the Commission put the emphasis on reforms to increase the efficiency and effectiveness of health spending as opposed to simply squeezing operating and capital expenses. At least in the projections contained in the 2017 Budget there appears a determination to not let spending soar after the restraint, although the pace of spending in health is expected to rise significantly to 3.0 per cent in 2017-18, 4.6 in 2018-19 and 3.3 in 2019-20. Still, these are below the growth rates the Commission calculated for the “status quo” and even further below other estimates of what is required to finance the “status quo” and the pace of spending increases in the 2000s. The Canada Institute of Health Information (CIHI) reports that in Ontario combined public and private spending on health was $155 or 2.5 per cent below the Canadian average in 2016.

Much of the media and analyst reporting on the Ontario 2017 Budget describes a re-investment or restoration of healthcare due to the projected uptick in spending increases. Implicitly these commentators accept a concept of “zero-base budgeting” whereby any increase in spending is compared to an alternative scenario of a freeze. Another way of looking at the projections of health care spending is that the rate of increases remain below what the Commission calculated for the “status quo” and well below what some other reports had estimated prior to the Commission’s work. From this perspective, one could view the budget’s health spending projections as suggesting restraint will remain in place for the health sector but it will be less stringent than in recent years.

In summary, the Ontario Government appears on track to its long-held objective of balancing the budget by 2017-18. It will get there in a somewhat different fashion than envisioned and recommended by the Commission on the Reform of Ontario’s Public Services. Stronger revenue growth, about half of which was generated through policy action not anticipated by the Commission, and lower interest rates that kept down public debt charges have allowed program spending to grow faster than the Commission recommended. Nonetheless, spending has been curtailed to a modest pace of expansion. Most notably, the stronger spending growth relative to the Commission’s “preferred scenario” has not been allowed to affect the health sector which represents 41.5 per cent of total program spending. Health spending increases have been almost exactly what the Commission recommended over the past 7 years even though the Commission acknowledged this would be difficult. It can, therefore, be said that discipline in health care spending has been an anchor to achieving the return to a balanced budget.

Don Drummond
Stauffer-Dunning Fellow
School of Policy Studies, Queen’s University

 

 

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